Google, Intel — Yes!
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Let’s talk Google and Intel, remind you that we’ve removed Chipotle, Xilinx, and Boeing from the newsletter portfolios some time ago. I’ll talk a little about PayPal’s run higher and address some other themes, including contingent liabilities with J&J and 3M.
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By Brian Nelson, CFA
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We don’t get everything right, of course, but lately, we’ve been really doing a great job getting the right ideas in front of you! I’m super proud of our team at Valuentum, and I hope that you are capitalizing on our research.
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In a prior article, I talked about how Facebook (FB) and Visa (V), two top-weighted ideas in the Best Ideas Newsletter portfolio, were on fire this year, but check this out: Alphabet (GOOG, GOOGL), another top-weighted idea, just reported a solid second-quarter report today after the close, and shares are indicated up approximately 7% after hours. Revenue in constant currency advanced 22%, non-GAAP operating margins held the line at 24%, while non-GAAP earnings per share of $14.21 trounced the market consensus.
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As with Facebook, we believe any DOJ intervention to break up these big tech companies, if it happens, will be a distinct positive as it will force the market to evaluate them on sum-of-the-parts basis, and that means generally on an optimistic enterprise free cash flow to the firm basis. In this light, we expect considerably more rapid price-to-fair value convergence than what otherwise may have occurred. We value Facebook at ~$230 per share and Alphabet at over $1,400 per share. Shares of Alphabet are surging above $1,200 at the moment, aided by news of a $25 billion buyback authorization on Class C shares, something which we thought was long overdue. View Alphabet’s stock page >>
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Another top-weighted idea, this one in the Dividend Growth Newsletter portfolio, Intel (INTC), beat expectations on both the top and bottom lines during its second quarter, and while revenue was down on a year-over-year basis, it did come in better than guidance. Shares look to be up about 6% after hours. Our thesis on Intel has been somewhat whipsawed given the situation with Apple (AAPL) and Qualcomm (QCOM), but it was relatively good news to see Intel sell its smartphone modem business to Apple given Intel’s prior decision not to throw more capital at the endeavor. We would have loved to see Intel take share from Qualcomm, but selling out may be the next best scenario. Intel’s shares have leapt back to our fair value estimate on the report which came with raised guidance for 2019. View Intel’s stock page >>
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Chipotle’s Rise from the Dead
Image shown: Chipotle was added to the Best Ideas Newsletter portfolio in April of 2018, and it was removed in April of 2019. That’s a 60%+ gain for one of our latest ideas in the Best Ideas Newsletter portfolio!
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Just a reminder, we’ve unloaded two big winners a while ago — those being, 1) the comeback in Chipotle (CMG) and 2) the surge in Xilinx (XLNX). We’re not looking back at either one of these companies, but they did turn out to be fantastic “trades,” capitalizing on near-term mispricings. I only bring these two up in case there may be members that are waiting for updates on them, or that have missed our decision to remove them. You can always view our newsletter portfolios and archives on the left column of our website. After being down for the count, Chipotle’s shares are now almost $780 each, well above the high end of our fair value estimate range. View Chipotle’s stock page >>
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Boeing (BA) was another idea that we made a big splash with during 2017 when it simply trounced the market that year. We removed shares in mid-March 2018, and while it looked like we may have been too cautious, our discipline allowed us to “cash in” on a huge run up and de-risk in advance of what was yet to come, the 737 MAX debacle. Sure, nobody could have predicted the tragedies, but applying a process that has clearly defined consider buying and consider selling criteria overlaid with an experienced analyst team helps a lot. The company’s second-quarter report, released July 25, was an absolute mess, and right now, we’re not interested in shares, no more than when we removed them March 2018. Our fair value estimate for Boeing is roughly ~$330 per share, as it has been since September 2018. View Boeing’s stock page >>
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I wanted to keep PayPal (PYPL) in front of you. The stock traded down to $115 per share during the trading session, July 25, and while it seems like a long time ago, the Best Ideas Newsletter portfolio inherited PayPal from the split with eBay (EBAY) when PayPal was just in the mid-$30s then. We’re not at all concerned about PayPal’s lowered top-line growth guidance given secular trends, and we actually liked that it boosted its adjusted 2019 earnings-per-share outlook when it reported second-quarter results. The company will have some hiccups as it transitions away from eBay in coming years, but we think PayPal will be a key player in the ever-accelerating trend toward a cashless society. View PayPal’s stock page >>
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The airline industry received a lot of attention during the trading session July 25 with Spirit Airlines (SAVE) falling more than 20%, to ~$42 per share. Our fair value estimate stands at $45 per share, so we’re not reading too much into the fall, and frankly, one might say it was expected given our point fair value estimate. We talk a lot about the airline business in Value Trap, but the operating leverage within their business models are tremendous, and if we’re not betting on the trajectory of oil prices or the economy, it’s tough to find comfort with holding an airline equity over the long haul. We’re just going to stay away. We don’t need the heartburn.
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The other day I talked about how to think about contingent liabilities because they have been propping up more and more of late with Facebook’s recent legal settlements but also with J&J (JNJ) and 3M (MMM). Remember, contingent liabilities are generally embedded within the equity price (market cap) already, and only changes in expectations of them may cause changes in the market cap, but generally in one-for-one fashion (dollar for dollar), not in perpetuity-fashion as in higher recurring costs, which would have a magnified impact. I know this is a lot to chew on, but said another way, we’re not too concerned about the situation at J&J and 3M, but that can change fast. Here’s our recent notes on them here and here, respectively.
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It’s been a great second-quarter earnings season thus far. Please let me know if you have any questions.
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Thank you,
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Brian Nelson, CFA
President, Investment Research
brian@valuentum.com
Valuentum Securities, Inc.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum‘s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.